Income Tax on HUF (Hindu Undivided Family)

What is Hindu Undivided Family (HUF)?

The Hindu Undivided Family (HUF) is defined as a separate entity for tax assessment under the Income-tax Act, 1961. As per section 2(31) of the Act, HUF is considered a “person”.

In accordance with Hindu Law, an HUF consists of individuals descended from a common ancestor, including wife and unmarried daughters, and is formed automatically within a Hindu Family, not through a contract.

Jain and Sikh families, although not governed by Hindu Law, are considered HUFs under the Act.

How is a Hindu Undivided Family (HUF) incorporated?

HUF, under both Hindu law and the Income Tax Act, 1961, is a result of legal recognition and not the result of any act of parties. It is a dynamic entity that expands with the birth of a family member and shrinks with the death of a member. Women join or leave the HUF upon marriage. As long as there is a family nucleus, a HUF can exist with only one male member for tax purposes. The term “Hindu Undivided Family” in the Income Tax Act refers to the same definition as a Hindu Joint Family under Hindu personal law. Under Hindu law, a joint family can consist of a single male member and the widows of deceased male members, and the Income Tax Act does not require a HUF to consist of at least two male members.

Can a single male incorporate HUF?

A family is defined as a group of individuals, not just one. It’s a requirement for a family to have multiple members. A single person, regardless of gender, does not qualify as a family. The concept of a “single-person family” is a paradox. According to section 2(31) of the Income Tax Act, 1961, a Hindu Undivided Family (HUF) is viewed as a separate entity distinct from an individual. An assessment of HUF status can only be made when the HUF has two or more members.

Residential Status of HUF

The residential status of a HUF for Income Tax purposes can be one of the following:

(1) Resident and Ordinarily Resident in India,

(2) Resident but not Ordinarily Resident, or

(3) Non-Resident.

The taxpayer’s residential status is determined annually by using the provisions in the Income-tax Law. The status of a HUF can change from year to year, being a resident and ordinarily resident one year, non-resident or resident but not ordinarily resident the next, and potentially changing again or staying the same in the future.

To determine the residency status of a HUF, the process involves two steps:

Step 1: Determine residential status

The HUF will be considered a resident in India for tax purposes if its control and management are situated (either partially or wholly) within India.

Step 2: Determine ordinary residency (only if HUF is a resident)

A resident HUF is considered both resident and ordinarily resident in India for the year if its manager (karta or manager) meets both of the following criteria:

  • Resides in India for a minimum of 2 years in the last 10 years prior to the relevant year.
  • Has spent 730 days or more in India in the last 7 years prior to the relevant year.

If the manager of the resident HUF fails to meet either of the above criteria, the HUF is considered a resident but not ordinarily resident.

How to Apply PAN of HUF?

A Form 49A is filed for the HUF PAN application online by paying the government fee.

Documents required for Application of PAN of HUF

(a) An affidavit by the karta of the Hindu Undivided Family stating the name, father’s name and address of all the coparceners on the date of application; and

(b)​ copy of any document applicable in the case of an individual, in respect of karta of the Hindu undivided family, as proof of identity, address and date of birth.

ITR Forms Applicable for Hindu Undivided Family (HUF)

HUF is required to file an income tax return in:

Form ITR-2: where the HUF is not having income from profits and gains of business or profession

Form ITR-3: Where the HUF is having income from profits and gains of business or profession)

Form ITR-4 Sugam: Where the HUF being a resident having total income upto Rs.50 lakh and having income from business and profession which is computed under sections 44AD, 44ADA or 44AE 44AE) and income from any of the following sources:

  • Salary / Pension
  • One House Property     
  • Other sources (Interest, Family Pension Dividend etc.)   
  • Agricultural Income up to ₹ 5,000           

Clubbing Provision applicable on HUF

Under the Income Tax Act (section 64(2)) the provisions for clubbing of income and assets apply. In case of conversion of property, the income from such property will be considered as the income of the transferor individual as per the Income Tax Act. If the converted property is allotted to the wife of the transferor individual on partition, the income from it will still be taxed in the transferor’s name. The provisions under section 64(1A) of the Income Tax Act state that the income from property allotted to minor children will be clubbed in the hands of the father.

Rate of Income Tax on HUF

  • An HUF is taxed on same slab rates which are applicable to an Individual.
  • An HUF is liable to pay Alternate Minimum Taxif the tax payable is less than 18.5 per cent (including cess and surcharge) of “Adjusted Total Income” subject to prescribed conditions

The following incomes are not taxed in the hands of HUF

  • If a member has transformed the self-acquired property into the joint family property without adequate compensation, the income from this property is exempt from tax for the family.
  • Income from an impartible estate, which belongs to the family, is taxed in the hands of the estate holder and not the Hindu Undivided Family (HUF).
  • Personal income of the members cannot be considered as the income of the HUF.
  • “Stridhan” is a woman’s sole property, and therefore, any income generated from it is not considered taxable income for the HUF.
  • Income from a daughter’s individual property is not taxable for the HUF, even if the property has been transferred to the HUF by the daughter.

Compute Income of HUF

To determine the income of an HUF, one must first identify its income under different heads (excluding any incomes that are exempt under sections 10 to 13A of the Act). Consider the following while computing the income:

  • If the HUF invests funds in a company or firm, any fees or compensation received by a member as a director or partner may be considered as the family’s income (if the fees or compensation result mainly from the investment of funds).
  • However, if the fees or compensation are earned in exchange for services rendered by the member in a personal capacity, it will be considered as the member’s personal income.
  • If the HUF pays compensation to the Karta or another member for services rendered, the compensation is deductible from the HUF’s income if the payment is genuine, not excessive, and made under a valid and legitimate agreement.

How to create HUF deed?

A Hindu Undivided Family (HUF) Deed can be created as follows:

  • Determine the members of the HUF: The first step is to identify the members who will be part of the HUF. In general, a Hindu Undivided Family consists of all the lineal descendants of a common ancestor along with their wives and unmarried daughters.
  • Draft the HUF Deed: The HUF Deed should be drafted in a clear and concise manner, specifying the names and details of the members of the HUF, the purpose of the HUF, and the distribution of assets and liabilities among the members.
  • Obtain signatures of all members: Once the HUF Deed is drafted, it must be signed by the members of the HUF.
  • Notarize the HUF Deed: The HUF Deed should then be notarized to make it legally binding.
  • Register the HUF Deed: Finally, the HUF Deed should be registered with the concerned Registrar of Companies or the Sub-Registrar of Assurances in your jurisdiction.

Note: It is advisable to seek the help of a chartered accountant for creating a valid and legally binding HUF Deed.

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